The Naked Emperor

The Midas Curse

excerpted from the book

The Post-Corporate World

Life After Capitalism

by David Korten

Kumarian Press, 1999, paper

p46

ACCURATE PRICES: FULL COSTS VERSUS PUBLIC SUBSIDIES

... Market theory explicitly states that for the market to
allocate resources efficiently, the costs of a product must be
borne fully by its producer and passed forward in the price charged
to the consumer. Similarly, investors must bear the risks of their
investments. Any subsidy, direct or indirect, distorts the incentives
of the market's self-regulating pricing mechanisms and reduces
the social efficiency of resource allocation.

By contrast, the institutions of capitalism are unabashed
proponents of corporate subsidies. Using mechanisms that range
from threatening to move jobs elsewhere to political contributions
and fabricated grassroots lobbying campaigns, they convince those
who control public expenditures to provide them subsidies for
research, extraction of resources, advertising products in foreign
markets, insuring overseas investments against political risks,
and an endless range of other activities. Banks and investment
houses regularly run to government to save them from the costs
of bad investment, as in the savings and loan bailout and the
repeated IMF and U.S. bailouts of bad loans to countries such
as Mexico, Thailand, Indonesia, Malaysia, and Korea.

Corporations are constantly upping the ante on what they demand
from state and local governments to bring jobs to their jurisdictions.
For example, the incentive package given by the state of Virginia
to Motorola to entice it to locate a research and manufacturing
facility there included a $55.9 million grant, a $ 1.6 billion
tax credit, and a reimbursement package worth $5 million for employee
training. In New York City, investment banks threatened to leave
the city for the suburbs, to which the cash-strapped city responded
with ever greater tax breaks and other public subsidies. By 1998,
$439 million in tax abatements had been granted to eighteen financial
institutions-including the New York Mercantile Exchange, New York's
largest commodity market-by the administration of Mayor Giuliani.
Big corporations now increasingly expect states to pick up a portion
of their wage bill, commonly by returning to the company a portion
of the state taxes withheld from qualified employees. In Tulsa,
Oklahoma, the county sales tax for one year was diverted from
public purposes to pay for construction of a new Whirlpool factory.
In addition, the state would reimburse Whirlpool 4.5 cents for
every dollar paid in wages to eleven hundred workers for ten years.

Corporations have been especially aggressive over the past
twenty years in seeking to avoid paying a fair share of taxes
to cover the public services and infrastructure they demand, including
roads and port facilities, the protection of their assets by the
U.S. military, and the public education of their workers. In the
1950s, corporate income taxes accounted for 39 percent of all
federal income tax revenue. From 1990 to 1995, that was only 19
percent. During that same period the share of federal income tax
revenues coming from individuals rose from 61 percent to 81 percent.
If in 1996 corporations had paid taxes at the same effective rate
as during the 1950s, it would have produced an additional $250
billion in federal revenues and wiped out the federal deficit
for that year.

It has been much the same story at local levels. In 1957,
corporations provided 45 percent of local property tax revenues
in the United States. By 1987, their share had dropped to about
16 percent.

The Cato Institute, a conservative Washington, D.C.-based
think tank, estimates that the U.S. government each year provides
corporations $75 billion in direct cash subsidies plus another
$60 billion in industry-specific tax breaks. Worldwide, government
subsidies for energy use- the majority for fossil fuel and nuclear
sources-are estimated to be from $235 billion to $350 billion,
a clear case of using public funds to encourage environmentally
destructive practices. Business analyst Paul Hawken has compiled
data suggesting that corporations in the United States may now
receive more in direct government financial subsidies than they
pay in taxes.

Then there are the costs of straightforward corporate crime
such a~ overbilling by defense contractors of some $25.9 billion,
and by Medicaid contractors, primarily insurance companies, of
an amount estimated by federal auditors at $23 billion in 1996.

Still another type of subsidy takes the form of unreimbursed
costs imposed on society by the products that corporations sell.
These include health costs of $53.9 billion a year from smoking
cigarettes, $135.8 billion for the consequences of unsafe vehicles,
$141.6 billion for injuries and accidents from unsafe workplaces,
and $274.7 billion for deaths from cancers caused by toxic exposures
in the workplace.

In Tyranny of the Bottom Line, CPA Ralph Estes compiles an
inventory of those public costs of private corporations that have
been documented by authoritative studies-not including direct
subsidies and tax breaks-and comes up with a conservative total
for the United States alone of $2.6 trillion a year in 1994 dollars.
This is roughly five times the corporate profits reported in the
United States for 1994 ($530 billion) and the equivalent of 37
percent of 1994 U.S. GDP of $6.9 trillion. If we were to extrapolate
this ratio to a global economy that had an estimated total output
of $29 trillion in 1997, it suggests that the annual cost to humanity
of maintaining the corporate infrastructure of capitalism may
be upward of $10.73 trillion.

In short, although capitalism claims to be an engine of wealth
creation, in fact its primary vehicle, the corporation, is more
accurately described as a powerful engine of wealth extraction-its
profits dependent on imposing enormous costs on the rest of society
so that a few top executives and large shareholders may enjoy
unconscionably large financial rewards. If market rules were applied,
most of the dominant corporations would have long ago found themselves
unable to cover their own costs and gone bankrupt or been restructured
into smaller, more efficient firms.

p51

CAPITAL ACCUMULATION: PRODUCTIVE VERSUS EXTRACTIVE INVESTMENT

... One of the most basic axioms of market economics is the
simple equation: personal savings equals investment. In other
words, market theory assumes that when people save, they defer
current consumption in favor of investing in future productive
output. As in the previous example, the winemaker might invest
some of his earnings in a new wine press to increase future production.

The most advanced stage of capitalism's pathology is known
as finance capital or finance capitalism. At this stage, the ownership
of capital becomes increasingly separated from its application
to production as power shifts from the entrepreneurs, inventors,
and industrialists who are engaged in actual productive activity
to financiers and rentiers who live solely from the income generated
from the ownership of financial or other assets. The financial
markets and the owners of capital become "increasingly purified
in purpose-detached from social concerns and abstracted from the
practical realities of commerce" and develop expectations
regarding the returns invested saving ought to earn that increasingly
"diverge from the underlying economic reality."

The focus at this point is on using money to make money by
expanding bank lending, creating financial and real estate bubbles,
and speculating on fluctuations in the prices of currencies and
other financial instruments. Consumed by their own illusions,
capitalism's foremost proponents and practitioners come to pride
themselves on having accomplished the equivalent of the ancient
alchemists' dream of turning baser metals into gold. The financial
excesses we are now witnessing on a global scale are much like
those that preceded the Great Depression of the 1930s.

They are all a part of the new global capitalism, and virtually
every country and person on the globe is to some extent subject
to the resulting economic dysfunction and instability.

The mechanisms employed by finance capitalism to make money
from money, without the intervening necessity of engaging in productive
activity, allow those with money to increase their claims against
society's stock of real wealth without contributing to its production.
Although the activities involved make a few people very wealthy,
from a societal perspective they are extractive rather than productive.
Finance capitalism's inability to tell the difference between
productive and extractive investment seems almost to be one of
its defining attributes.

The process of making money without creating wealth starts
with banks' creating money out of nothing each time they issue
a loan. When I studied economics some years ago I was taught that
banks are financial intermediaries. They take in money from those
who have savings and make it available in the form of loans to
those who invest it in productive activities. It is rather like
one individual making a loan to another, except that as intermediary
the bank translates the short-term savings of one group into long-term
loans for another, does the paperwork, and takes the risk-or so
I was led to believe.

In truth, there is another and more basic difference. If I
loan $1,000 to another person-call her Alice-I no longer have
the use of that money until Alice repays me. If, however, I deposit
my $1,000 in a bank and the bank loans the $1,000 to Alice, Alice
has her money and I still have mine. Between Alice and me we now
have access to $2,000 in ready cash rather than $1,000. The bank
did not in fact loan Alice "my" money. Rather it created
the second $1,000 out of nothing, simply by opening an account
in Alice's name and typing in $1,000.

Clearly the bank has something more going on here than simply
playing the role of intermediary between savers and borrowers.
It is in the literal sense making money - creating it, putting
it into circulation, and collecting interest on it-simply by posting
a number to an account. Furthermore, the only thing of value that
stands behind that money is the willingness of the rest of us
to exchange our labor and other property for it. In a very real
sense, the bank makes or creates the money and we guarantee its
value with our labor and whatever other forms of real wealth we
agree to exchange for it.

Another way to make money out of nothing without contributing
to the creation of any real wealth is to create a financial bubble,
which is a sophisticated version of the classic pyramid or Ponzi
scheme. The fraudulent investment scheme that created a national
crisis in Albania in the mid- 1 990s is an example. People were
invited to participate in investment funds that promised returns
as high as 25 percent a month. Impressed by the good fortune brought
to them by the triumph of capitalism, some people handed over
their savings. Though the investment scheme was not backed by
any productive activity, with so much money pouring in it was
easy for the promoters to use a portion of the money from new
investors to pay the promised interest to the earlier investors.
These payments established the credibility of the scheme and convinced
still more people to invest. Soon the country was caught up in
a speculative frenzy. Farmers sold their flocks and urban dwellers
their apartments to share in the promised bonanza of effortless
wealth. The inevitable collapse sparked widespread riots, arson,
and looting when the Albanian government failed to make up the
losses.

The speculative financial bubble, which involves bidding up
the price of an asset far beyond its underlying value, is little
more than a sophisticated and less obviously fraudulent variant
of such pyramid scams. One of history's more famous financial
bubbles occurred in seventeenth-century Holland when it was found
that certain tulip bulbs, when attacked by a particular virus,
produced flowers of brilliantly variegated colors. These bulbs
came to be highly valued by collectors. Then speculators began
acquiring them, pushing prices higher. Others came in to profit
from the bonanza of prices that seemed to rise without limit.
Soon everyone, from nobles to chimney sweeps, was in on the action,
bidding up the price of a single bulb of a particularly prized
variety to the equivalent of $60,000 in current dollars. The inevitable
bursting of the bubble came in 1637.

Those of us inclined to laugh at the innocence of the Albanians
or the seventeenth-century Dutch speculators should first consider
our own participation in the world's stock markets. We operate
on the mistaken belief that the money we use to buy stock or mutual
fund shares goes into financing future productive output. However,
in all but the rare instance in which we are buying shares sold
in an initial public offering, not a penny of our money goes to
the company whose shares we are buying.

According to 1993 Federal Reserve figures, equity financing
raised through the sale of new shares contributed only 4 percent
of the total financial capital of U.S. public corporations. The
rest came from borrowing (14 percent) and retained earnings (82
percent). Furthermore, from 1987 to 1994, corporations paid out
more to buy back their own shares than they received from new
stock issues. In early 1998, what is loosely called investment
capital was flowing from corporations to the stock market at an
annual rate of $110 billion.

We live in an era in which, even as billions of dollars in
new "investment', flow into the stock market and pump up
prices at record rates, the net flow of funds from the stock market
to the corporations in which we are in theory investing is actually
negative. In truth, the stock market is a sophisticated gambling
casino with the unique feature that through their interactions
the players inflate the prices of the stocks in play to increase
their collective financial assets and thereby their claims on
the real wealth of the rest of the society.

So when I buy stock shares through my broker, not a penny
goes to the company I'm presumably buying. After the broker takes
a commission, what is left goes to the person who sold the shares.
When I make my purchase, I'm simply betting that in the future
someone else will be willing to pay me more for that piece of
paper than I've just paid for it. If I were a really sophisticated
investor, I would be betting on future price declines as well
as future price increases, and I would be borrowing money to leverage
my bets. No matter how I go about it, however, it has no more
to do with real investing than betting on a number on a Las Vegas
roulette wheel.

*****

The Midas Curse

p75
The Corporation as Agent

As we look for the driving forces behind the destruction of
life for money \ to enrich the few, our attention is inexorably
drawn to the institution of the corporation. As the systems of
finance have globalized and institutionalized, the corporation's
ties of accountability to people and the interests of the living
world have steadily weakened. Because the corporation is populated
by the people who work in its employ, there is a tendency to think
of the institution almost as a living person-an illusion cultivated
by corporate public relations and given legal standing by court
rulings. Yet the corporation is not a person and it does not live.
It is a lifeless bundle of legally protected financial rights
and relationships brilliantly designed to serve money and its
imperatives. It is money that flows in its veins, not blood. The
corporation has neither soul nor conscience.

We who serve in the corporation's employ, even the powerful
and well-paid CEOs and money managers, are hirelings paid to embrace
the corporation's values and do its bidding. In preparation for
our corporate roles we are trained in the language of finance
and the methods by which a price can be assigned to everything
and every choice can be evaluated in financial terms. Eventually
we come to accept it as right and natural that we ourselves be
evaluated on financial performance and motivated by financial
incentives.

It is instructive to recall that the modern corporation is
a descendant of the chartered corporations, such as the British
East India Company and the Hudson's Bay Company, that were formed
by the British crown as monopolies to exploit colonial territories
by extracting their labor and resources and monopolizing their
markets. Some claim the American Revolution was as much a revolution
against the crown corporations as against the crown itself. As
a consequence, corporations were treated with great caution by
both citizens and politicians in the early days of the new American
republic. The few corporate charters issued were generally for
a limited duration to serve a carefully delineated public purpose,
such as constructing a canal system. The crown has since been
replaced by the modern shareholder and access to corporate charters
has been democratized, but our current experience with the global
megacorporation suggests its role has not changed.

... the only way most corporations can produce the profits
the financial system currently demands is by passing off ever
greater costs to the society. This includes expropriating and
selling off the living capital of human societies and the planet
at such a rate that, in the words of ecological economist Herman
Daly, "It looks as though we are holding a going-out-of-business
sale." We need scarcely look beyond the daily reports of
The Wall Street Journal to find examples of the world's largest
corporations profiting from the

* Depletion of human capital by maintaining substandard working
conditions in places like the Mexican maquiladoras, where they
employ once-vital and productive young women for three to four
years until failed eyesight, allergies, kidney problems, and repetitive
stress injuries leave them permanently handicapped;

* Depletion of social capital by breaking up unions, bidding
down wages, treating workers as expendable commodities, and uprooting
key plants on which community economies are dependent to move
them to lower-cost locations-leaving it to society to absorb the
family and community breakdown and violence that are inevitable
consequences of the resulting stress; and

* Depletion of institutional capital by undermining the necessary
function and credibility of governments and democratic governance
as they pay out millions in campaign contributions to win public
subsidies, bailouts, and tax exemptions and fight to weaken environmental,
health, and labor standards essential to the long-term health
of society.